Bradley Hewitt

Bradley Hewitt asked for confirmation on the implied low double-digit organic growth in HVAC for 2026, specifically if the implied growth rate for the rest of the segment (excluding 50% data center growth and Ingénia revenue growth) is around 3%, and the puts and takes for this core HVAC growth. He also inquired if the D&M segment's 25% margin guidance for 2026, exceeding the 22%-24% target, should be considered a new baseline or if the previous target remains appropriate.

Answer

Gene Lowe, President and CEO, confirmed that Bradley Hewitt's math is directionally correct, implying low single-digit growth for the non-data center, non-air handling parts of the HVAC business. Regarding D&M margins, Gene Lowe explained that the improvement is due to a mix of factors and structural cost optimization initiatives, which are expected to be durable. He noted that the 25% margin is at the top of the previously guided 22%-24% range but stated that the company is not currently looking to change the overall target profile of the business, though it will be reviewed through the year and into next year.

Bradley Hewitt asked for confirmation on the implied low double-digit organic growth in HVAC for 2026, and if the implied growth rate for core HVAC (excluding Ingénia and data center) is around 3%. He also questioned whether the D&M segment's 25% midpoint margin guidance, exceeding the 22%-24% target, should be considered a new baseline or if the previous target remains appropriate.

Answer

President and CEO Gene Lowe confirmed that the implied growth rate for the non-data center, non-air handling parts of the HVAC business is directionally correct at low single digits. Regarding D&M margins, Mr. Lowe explained that the improvement is due to a mix of favorable project mix and structural cost optimization initiatives, which are expected to be durable. He noted that the 25% margin is at the top of the previously guided 22%-24% range, and while not looking to change the overall target profile for now, it's something they will certainly review through the year and into next year.

Bradley Hewitt asked for a breakdown of the gross and net financial impact from tariffs for the year and inquired about the newly acquired Sigma & Omega business, specifically its through-cycle growth rates and current EBITDA margin profile.

Answer

Chief Financial Officer Mark Carano detailed the tariff impact, stating a gross cost in the low $20 million range is being offset by about $14 million in pricing actions, resulting in a net cost of approximately $6 million. President and CEO Eugene Lowe described Sigma & Omega as a highly complementary business with strong products for multistory buildings and significant growth synergy potential in the U.S. market. Mark Carano added that the business generates about $65 million in annual revenue and its segment income margin is slightly lower than the current HVAC segment average.

Bradley Hewitt asked about Ingénia's Q4 revenue performance relative to expectations and its growth outlook for 2025. He also inquired about the synergy assumptions and long-term ROIC for the KTS acquisition, and the potential impact on the business from changes in Department of Defense spending.

Answer

CFO Mark Carano explained that a slight delay in a facility expansion at Ingénia impacted Q4 revenue, but the project is now complete and back on track. Regarding KTS, Mark Carano stated they are watching defense spending but believe the technology is critical to military modernization and confirmed the deal meets their 3-5 year ROIC targets. CEO Eugene Lowe detailed commercial and technical synergies, including leveraging SPX's global relationships and combining KTS solutions with SPX's tactical data links.

Bradley Hewitt asked for clarification on the gross tariff headwind assumptions, including the rates and the impact of exemptions, and later inquired about the capital allocation strategy, specifically the pace of share buybacks.

Answer

CFO Nathan Winters explained the guidance assumes current tariff rates, including exemptions for most mobile computing products and USMCA benefits, resulting in a net $70 million impact for the year. Regarding capital allocation, he confirmed they accelerated buybacks to $200 million year-to-date to leverage market volatility and expect to remain active for the rest of the year.

Bradley Hewitt of Wolfe Research asked why the embedded 2025 organic incremental margins were not stronger during a period of volume recovery. He also inquired about the recent sequential step-down in gross margin for the services and software business.

Answer

CFO Nathan Winters explained that the 2025 incremental margin is impacted by a ~$20 million headwind from new tariffs, primarily in the first half of the year. He also noted that while Q4 services gross margin was down due to the timing of high repair volumes, the segment is expected to remain accretive going forward.

Bradley Hewitt asked if pipeline conversion rates signal a more meaningful return of large orders in 2025 and what level of recovery is needed to meet long-term growth targets. He also questioned the drivers behind the Q4 sequential EBITDA margin guidance.

Answer

CEO William Burns expressed optimism for continued recovery into 2025 but noted it's too early for specific guidance due to uneven market recovery and macro headwinds. CFO Nathan Winters explained the Q4 EBITDA margin guide of ~22% is driven by volume leverage, but a higher mix of large deals will create a slight sequential drag on gross margin compared to Q3.

Bradley Hewitt, on for Nigel Coe, asked for a breakdown of core growth and margin assumptions by segment for Q2 and the second half of the year. He also requested more detail on the Facility and Asset Lifecycle (FAL) business's growth and any spending hesitancy from government customers.

Answer

Executive Elena Rosman provided directional guidance, expecting low single-digit core growth for New Fortive and a mid-single-digit decline for PT in Q2, with margins sequentially lower due to tariffs before improving in the second half. CEO James Lico added that FAL's strong Q1 growth was led by ServiceChannel, while Gordian saw some minor hesitation from government customers, but procurement remained strong.

Bradley Hewitt of Wolfe Research asked for updated growth assumptions within the Industrial Process (IP) segment and inquired about the demand elasticity assumptions related to tariff-driven price hikes.

Answer

CFO Emmanuel Caprais and CEO Luca Savi clarified that IP growth assumptions are unchanged, as the recent surge in long-lead project orders primarily impacts future years, while the short-cycle business remains stable at a high level. Regarding tariffs, Caprais stated that the guidance assumes no demand destruction, as ITT expects to successfully pass on costs since competitors face similar sourcing pressures, preventing a competitive disadvantage.

Bradley Hewitt asked for a breakdown of the Industrial Process (IP) segment's 2025 growth outlook between projects and short-cycle, the drivers of legacy IP margin expansion, and the viability of the 22% margin target for CCT.

Answer

CEO Luca Savi cited positive price/cost, supply chain gains, and operational productivity as key drivers for legacy IP margin expansion. CFO Emmanuel Caprais added that Svanehøj will also contribute with double-digit growth and margin expansion. For CCT, Caprais confirmed that excluding kSARIA, the segment margin should be near 21% in 2025, positioning them well to achieve their 22% target in 2026.

Bradley Hewitt asked about the company's assumptions for the phasing of delayed project returns and the magnitude of delays pushed from Q4 2024 into 2025. He also questioned how a potentially rising net leverage ratio might constrain capital deployment in the near term.

Answer

CFO Anselm Wong explained that the Q4 forecast assumes the weak demand trends from Q3 will continue across both storage and commercial segments, without forecasting any release of projects currently on hold. CEO Ramey Jackson added that the macro headwinds remain unchanged. Regarding leverage, Wong stated that while they monitor the ratio, they expect to remain well within their 2x to 3x target range and do not see it as a major constraint on capital allocation.

Brad Hewitt inquired about the M&A pipeline, asking about the distribution of targets based on their expected time to reach 10% ROIC. He also asked about the importance of entry multiples in the M&A decision-making process.

Answer

SVP and CFO Sameer Ralhan described the M&A pipeline as a 'mosaic of opportunities' with a broad range of ROIC timelines, from quicker bolt-ons to longer-term technology investments, and stated it is not skewed one way. He emphasized that while entry multiple is an input, the ultimate focus is on long-term value creation through growth and margin expansion via the Veralto Enterprise System (VES).